Analysis of International Technology Development and Commercialization Policy Instruments and Infrastructures

Analysis of International Technology Development and Commercialization Policy Instruments and Infrastructures Gregory Tassey Economic Policy Research Center University of Washington July 2018 The United States emerged from World War II as the dominant technology-driven economy in the world. The development of new technologies benefited from substantial investment in basic science.1 For decades, this science base was drawn upon to the extent that virtually every major technology with global reach was developed and initially commercialized within the U.S. economy. This was accomplished by an unprecedented combination of government and industry investment in research and development (R&D) coupled with subsequent investment in technology-implementing hardware and software, skilled labor, and a world leading technology- based infrastructure, including top-rated universities and government laboratories. As a consequence, for three decades after WWII the United States was the dominant leader in 1 The U.S. still has 79 of the world’s top 100 universities in 2018, as ranked by uniRank (http://www.4icu.org/top- universities-world/). science and technology development and subsequent innovation. Although most of this technology was initially developed for specific missions such as national defense and later for space exploration, energy independence, and national health, the resulting “generic technologies” or “technology platforms” eventually were applied to commercial markets. Without significant competition from a global economy still recovering from WWII, the inefficiency of this indirect and drawn out process of depending on spinoffs from mission- oriented R&D was not burdensome. U.S. jobs, personal incomes, and overall wealth rose steadily, as a range of U.S. developed technologies spurred significant productivity growth. But, while mission technologies had substantial R&D budgets and large government bureaucracies to manage their development, the Federal Government had and continues to have very little institutionalized technology-based economic development (TBED) policy capability. The lack of a substantive and comprehensive national innovation policy derives from the U.S. tradition of a laissez-faire approach to developing commercial applications. It was asserted that market opportunity was sufficient to entice risk taking and thus lead to the commercialization of innovative products and services. This rather simplistic market sufficiency philosophy was not a problem in the absence of significant foreign competition nor was the fact that government R&D and associated infrastructure support were strongly oriented toward social objectives. The U.S. economy has had a strong tradition of entrepreneurial activity, which encouraged risk taking. Coupled with plentiful venture capital, the U.S. economy experienced substantial innovation and subsequent technology-based growth. The rate of growth was further supported by a U.S. educational system that produced a consistently strong pool of skilled workers, including large numbers of immigrants from around the world who contributed significantly to the U.S. advantage in both skilled workers and entrepreneurs. 1. The TBED Policy Deficit The cost in terms of restrained economic growth of an inadequate TBED policy is due to the fact that today’s global technology platforms are increasingly developed elsewhere in the world, creating increasingly severe pressure on domestic industries and supporting infrastructures. Indicative of restrained U.S. growth is the fact that domestic fixed private investment (FPI) in physical assets such as machinery, land, buildings, installations, vehicles, and technology is too low, and survey after survey of industry managers show that our supply of skilled labor is inadequate. U.S. Government research institutions and R&D budgets are still oriented largely toward a set of social objectives such as defense and public health that only indirectly leverage economic growth. At the same time, other economies have focused largely on optimizing their R&D investment to maximize the growth of their domestic economies. The negative economic impact has been pronounced. For the first 30 years after World War II (1948-1978), when the United States was the dominant technology-driven and thus the highest 2 productivity economy, the average annual real growth rate of Gross Domestic Product (GDP) was 3.9%. During the next 30 years, the growth rate dropped to 3.0%, as the effects of globalization began to be felt. Since the 2008 recession, real economic growth has averaged 2.1%, and the Federal Reserve forecasts the growth rate to remain at around 2% for the foreseeable future. Thus, the U.S. economy is expanding at half its post-WWII pace. One component of GDP that deserves special attention is household income, as it is the single largest source of demand. In 2016, U.S. real median household income ($59,039) finally exceeded the level reached nine years earlier in 2007, just before the Great Recession. Many analysts have characterized this event as encouraging, but the reality is that in addition to taking too long to occur as a cyclical rebound, this important income measure has barely nudged above the 1999 peak of $58,665. In other words, in the past 17 years, real household income has been flat. By far the most important policy issue for long-term domestic economic growth is the fact that China, South Korea, and other Asian nations have raised their productivities steadily for several Fig. 1 Trade Balances in “Advanced Technology Products” and All Manufacturing: 1988-2016 $billions 100 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -100 Advanced Technology Products -200 -300 All Manufacturing -400 -500 -600 -700 -800 Drain on GDP over 28-year period: -900 $10.6 trillion (in 2009 dollars) -1,000 Source: Census Bureau decades. This makes their exports increasingly competitive on their own merits. Thus, even if all trade barriers are removed, an economy still has to develop competitive products and services to grow. As described in detail in this paper, a major global shift is occurring away from the U.S. economic growth model of laissez-faire economic growth policy toward a “public-private investment” model that more efficiently supports technology-based economic development (TBED). The key attribute of this growth model is cooperative and coordinated investment by the public and private sectors. 3 Further, this model is being implemented to an increasing extent on a regional basis to promote competitive differentiation and to capture co-location synergies. However, the aggregate impact of the collective advancement of competitor TBED policies in Europe and Asia is seen in the long-term decline in U.S. trade competitiveness, as demonstrated in Fig.1. As described in Tassey (2018b), TBED policies are a complex set of public and private investments. This stands in contrast to traditional U.S. technology-based economic growth policy in which the only frequently mentioned metric driving “innovation policy” was R&D intensity. R&D intensity is certainly correlated with per capita GDP, but this summary statistic ignores a wide range of financial and institutional policies that determine the efficiency of R&D spending and thereby the rate of productivity growth and ultimately GDP growth. Even so, it remains a an important summary indicator of an economies investment in technology as the means of competing in the global economy. As Table 1 shows, the U.S. economy has not kept up with its major competitors. Thus, R&D efficiency issues aside, the American economy is not responding to globalization. Table 1 Comparative Growth Rates in National R&D Intensity United States France Germany U.K. China Japan South Korea % Change 1991-2015 5.0% -4.3% 18.6% 16.3% 183.6% 13.8% 135.0% Source: OECD, Main Science and Technology Indicators/Country R&D Intensities, 2015 Moreover, even with a high R&D intensity, many steps and a complex set of investments and institutional resources are required to compete in the increasingly technology driven global economy where competing economies are investing aggressively in the range of public and private assets that create a modern, competitive innovation ecosystem. Having a leading university system that produces advances in basic science is a prerequisite for technology-based competitiveness. However, the complexity of successfully developing and commercializing new technologies requires a complex set of institutional and private sector investments. Each stage of the evolution of a technology’s life cycle is dependent on unique sets of public and private assets. For example, Parilla et al (2015) argue that “U.S. manufacturers are often unable to bridge the ‘valley of death’ between the basic research phase and industrial production due to lack of capital and other key resources.” The valley-of-death label results from the fact that the increasing complexity of modern science does not allow a direct transition to the applied R&D, which produces the technologies that drive innovation. The result of this critical “transition phase” of R&D between science and the development of 4 proprietary technologies are the quasi-public “technology platforms” that prove technological concepts and hence reduce technical and market risk sufficiently to allow positive corporate decision making with respect to undertaking the substantial applied R&D that produces the market ready “proprietary technologies”. The valley of death will widen without

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